EMPHASIS ON ROI
Return on investment (ROI) has become quite the buzz phrase in recent years, especially in relation to information technology (IT) and IT projects. Due to the effort and difficulty in defining, calculating and owning ROI philosophies, most companies have allowed it to be pushed to the wayside as a bygone measure.
We here at Leale Solutions maintain an emphasis on ROI. We want to outline our ROI philosophy which takes into account hard factors like resource costs and soft factors like people and process. These are all inputs into the Leale Solutions ROI equation, more on that later. We understand that some of the required inputs are easier to quantify than others. We strive to objectively quantify these inputs because every one of us here at Leale Solutions is a business owner or stakeholder. We understand the need to measure and calculate the effectiveness of our business decisions in a clear scientific way. We also know that there is a human factor. Our process has been honed to objectively measure both hard and soft factors for true ROI. Below we explore and articulate our process and calculations to ensure ROI is guaranteed for you and your business. On to definitions and calculations!
Return on Investment (ROI) is defined as a business performance metric
The generic ROI calculation is defined as a percentage wherein:
ROI % = (Return or Gain from Investment – Cost of Investment)/Cost of Investment x 100
While this calculation is an accurate textbook definition, in the real world this calculation is missing the elements of time and people. The truth is that business investments have a finite time window in terms of ROI for most businesses. People and the human factor is the other missing element. In order to decide if a business initiative is worth the risk to implement and provide adequate ROI, people are necessary for every step. Enter people, process, and estimation of consumption of resources.Other terms with definitions include:
- IRR (internal rate of return) is the return % of the investment by time period usually expressed in months or years. I.e. ‘12% IRR / Month’
- Payback or breakeven point is expressed as the number of time increments (usually months or years) it takes to reclaim the investment. The shorter the time period, the better.
Our Communication Philosophy and How It Is Different
People and Process ROI is just as dependent on people and process as it is on a formula or algorithm. People and the ability to trust and govern (process) are key elements in this calculation. Sometimes it is difficult to differentiate between people and process. We all get caught up in our daily activities and assume that a business operation is functioning correctly. ‘Operations is in charge of that’ well actually, Steven is in charge of operations and he is in charge of that. Operations doesn’t run itself. How does operations do when Steven is on vacation or if he leaves the company? After all, as we all know, people come and go. This is why process is so important. Standardized and documented processes help ensure that even in the event that the business loses people the process is repeatable. Here at Leale Solutions, we believe in people and process. Technology is meant to bind people to process.
Why all the fuss? Forecasting is defined as to predict or estimate (a future event or trend).Forecasting ROI is a powerful tool we employ regularly to evaluate the risk of an IT project investment. Forecasted ROI is dependent on properly estimating the project scope and resources required to accomplish the work effort. Initially this forecasting can be a ‘paint in broad strokes’ method. However, if a project of considerable scope is to be undertaken it is advisable that true ROI be calculated to determine the validity of early assumptions. ROI is also dependent upon return of investment which can be difficult to forecast. We generally use as much hard data as possible and formulate ‘rainy day’ and ‘sunny day’ scenarios in our approach to return of investment forecasting. If the ‘rainy day’ scenario return on investment forecast is acceptable, we proceed. If not, we adjust scope and costs and try again, recalculating over and over again. This has been very effective in helping us determine the investments we are comfortable with moving forward.
Forecasted ROI can be a valuable road marker in whether or not your company should undertake the IT project you are considering. By comparing the forecasted ROI of different projects or proposals, this can provide an indication as to which solution makes the most sense for your company. Each solution may make sense because of time to market, or cost or both. Forecasted ROI provides executives and stakeholders an initial indication of benefit for the business. ROI can also be a key indicator of a risky investment.
Estimation of required resources is at the heart of ROI. By identifying how much work really needs to be accomplished, we determine the scope of a project or task. This is why requirements gathering is vital to ROI. By gathering the requirements through interviews and documentation we then plug these into our Software Development Life Cycle (SDLC) process. You can read about our defined SDLC process here. By thoroughly documenting all of the features and requirement needed for the proposed solution we have our baseline. We work with our technical team to identify all of the tasks, sub tasks and work efforts needed to accomplish the task at hand. We record this in a traceability matrix where each individual task is estimated. How do you eat an elephant? The answer of course is one bite at a time. I’m certainly not condoning eating elephants. In fact, we have no elephant eating experience. However, the premise is extremely close to the mark we are trying to make. The aggregate sum of many estimated project tasks becomes the estimate of the entire project. Requirements and a requirements traceability matrix are necessary to evaluate the detailed scope of a project. These are integral parts of the process we follow here at Leale Solutions every day.
The ability to stick and move Things change, how does this affect ROI? The answer depends on what changed and how much it changed. If the change is a color scheme on a series of web page, then the effects are not that important. If you wanted software that made tacos yesterday but today it needs to make widgets, we might need to reevaluate estimates that were given yesterday. This has a direct impact on ROI because of the element of time. If it takes 3 months to make a ‘taco maker’ but 6 months to create a ‘widget maker’ then ROI and payback time changes. As seasoned IT professionals, we here at Leale Solutions are well versed in the book of changing requirements. Plans and ideas change from time to time. Honestly, we see this in some form or factor with every project. The ability to evaluate the changing requirements, document them, recalculate the total work effort which effectively adjusts the ROI and communicates the results to the decision makers is what sets us apart from our competition.
Estimation and flexibility to re-estimate As previously stated, correct project effort and scope estimation is the one of the largest factors in determining ROI. As stated directly above, you also need the ability adapt to changes in project scope, size and resources. Our experiences as IT professionals have taught us a few things that are as true in life as they are anywhere else. One of these gems is that disappointment is rooted in unrealistic expectations. This is applicable with software development and project management. The ability to confidently follow a process that will yield ROI calculated results that can be communicated to decision makers and stakeholders is necessary. Adhering to the same SDLC process when a project changes is paramount to maintain consistency. Repeatable processes ensure consistency. We are firm in our confidence in our SDLC model to deliver consistent results over and over regardless of the number and scope of changes. The ability to reassess and recalculate ROI once additions and changes are introduced is vital to keeping expectations in line with reality and avoiding disappointment.
In summary, ROI is a calculation of costs and return and is dependent upon time, people and process. The time factor is dependent upon estimation. Proper and accurate estimation is rooted in requirements gathering. This is a cycle. When the requirements change the estimates have to change. This in turn has an effect on the time it takes to accomplish the work effort and ultimately the ROI factor. Having a sound process and experienced people to gather requirements and perform estimation is paramount. Changing scope requires requirements change and a recalculation. This is all part of our Software Development Life Cycle (SDLC) and philosophy that we live and breathe every day at Leale Solutions. We have the experience to adapt to changes and the communication skills to keep everyone on the same page.